Indian Finance Minister Nirmala Sitharaman. Photo: AFP

While the Indian government gives the final touches to the 2020-21 federal budget, it is saddled with many challenges. The economy is facing the worst slowdown in a decade, with the International Monetary Fund and other agencies painting a gloomy picture.

India’s economic growth has slowed despite a 135-basis-point cut in interest rates by the central bank in February 2019. This will leave the government little space to provide much-needed fiscal stimulus to boost the economy as it prepares to present the budget on Saturday, February 1.

The growth slowdown has hit the government’s finances hard, and this fiscal year the government may end up with a revenue shortfall of 2 trillion rupees (US$28 billion). Lack of demand and weak corporate earnings growth have led to lagging tax collections. There are even reports that direct tax collection this fiscal year may be even less than the preceding year – something that has not happened in two decades.

According to media reports, as of January 23, the Tax Department has collected only 7.3 trillion rupees ($102 billion), more than 5% less than the amount collected last year. Tax officials now fear this year’s collection may fall below the 11.5 trillion rupees collected in 2018-19. The government had set an ambitious direct-tax-collection target of 13.5 trillion rupees ($189 billion) for this fiscal year

In addition, indirect taxes may fall short by about 500 billion rupees on the drop in collections of the goods and services tax in a sluggish economy. The government had initially set a monthly target of 1 trillion rupees for its monthly GST collection, but it managed to achieve this feat only during April, May, July, November and December. It later revised the target to 1.1 trillion rupees for the last four months of the fiscal year.

The recent cuts in corporate taxes and monetary easing by the central bank have failed to boost investments. On the other hand, it only added to the sluggish tax collections. Direct taxes account for about 80% of the government’s projection for annual revenue, and a shortfall may force it to borrow to meet expenditures.

The slowing economy has also worsened the job prospects of those graduating from colleges and universities. India’s unemployment rate stood at 7.7% in December, according to data released by the Centre for Monitoring Indian Economy (CMIE). Earlier ahead of the general election there was controversy over a newspaper report that claimed India’s unemployment rate was at a 45-year high of 6.1% for the 2017-18 fiscal year. The government vehemently denied the claim but refused to release the periodic labor force report.

It was released only after the results of the general election were out in May and Prime Minister Narendra Modi’s government was re-elected. The unemployment rate was indeed 6.1%, thereby vindicating the earlier report.

The government may also miss its deficit estimate of 3.3%. If off-budget liabilities are also included, the slippage could be even more. Former finance secretary Subhash Chandra Garg has expressed concern over off-budgeting and said it is time for India to come clean on its fiscal-deficit numbers.

Garg pointed out that the country’s 2019-20 fiscal deficit could reach 5% of gross domestic product if all off-budget liabilities are taken into account. He estimated that adding the off-budget borrowings for the previous years, India’s actual fiscal deficit was 4.4% in 2017-18 and 4.7% in 2018-19.

As tax revenues remained poor, the government has set a disinvestment target of 1.05 trillion rupees ($15 billion) for this financial year to offload loss-making state-owned enterprises. It plans to sell Air India, Bharat Petroleum, Shipping Corporation of India and some other SOEs. But it is unlikely to meet this ambitious target this fiscal.

Challenges ahead

To spur consumer demand and investment, the government may raise spending on infrastructure and cut some personal tax to spur consumer demand and investment.

Finance Minister Nirmala Sitharaman is expected to announce a plan in the budget to invest 105 trillion rupees ($1.48 trillion) in infrastructure over the next five years. The National Democratic Alliance government has increased state spending on roads, railways, airports and ports, and has pruned subsidies.

To boost domestic manufacturing, the budget is also expected to increase import duties on more than 50 items, including electronics, electrical goods, chemicals and handicrafts, targeting about $56 billion worth of imports from China and elsewhere.

Domestic investors expect some relief on income-tax rates after a cut in corporate-tax rates last September. However, critics argue that income tax is paid by a small percentage of the population, so it may not make much difference.

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